Banks as patient lenders: Evidence from a tax reform

We provide new evidence on how deposit funding affects bank lending. For identification, we exploit the 2011 reform of the investment income tax in Italy that induced households to substitute bank bonds with deposits. We find that banks with larger increases in deposits expand the supply of credit l...

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Bibliographic Details
Published in:	Journal of financial economics 2021-07, Vol.141 (1), p.6-26
Main Authors:	Carletti, Elena, De Marco, Filippo, Ioannidou, Vasso, Sette, Enrico
Format:	Article
Language:	eng
Subjects:	Banking industry Banks Deposits Government guarantee Households Income taxes Lines of credit Maturity Risk-taking Tax legislation Tax reform Taxation
Online Access:	Get full text
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Summary:	We provide new evidence on how deposit funding affects bank lending. For identification, we exploit the 2011 reform of the investment income tax in Italy that induced households to substitute bank bonds with deposits. We find that banks with larger increases in deposits expand the supply of credit lines and long-term credit to low-risk firms. Additional evidence indicates that these results are consistent with theories emphasizing the demandable nature of the deposit contract rather than theories stressing the stability of deposit funding due to government guarantees. In this regard, we show that banks under stress face large runs on retail deposits, but not on retail bonds.
ISSN:	0304-405X 1879-2774